AIG Sells Stake In AIA But Still Has Its Sights On Asian Growth

December 17th, 2012 by Trefis Team
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Following the sale of a huge chunk of its stake in International Lease Finance Corporation (ILFC) last week, insurance giant AIG (NYSE:AIG) is planning to sell a portion (if not all) of its stake in AIA Group, an insurance group with a vast presence in Asia. (For more on the ILFC sale, refer to our article AIG Sells Aircraft Leasing Unit To Double Down On Core Insurance Business)

AIA was once a big part of AIG’s operations but following the $182 billion government bailout in 2008, the company was forced to sell its stake in the group. In 2010, AIG sold two-thirds of its stake in AIA raising $20.5 billion with subsequent stake sales this year raising another $8 billion. AIG currently holds a 14% stake in AIA and is looking to raise as much as $6.5 billion with the latest sale. [1]

Our $34 valuation of the AIG’s stock is in-line with the current market price.

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Check out our complete coverage of AIG here

Still Looking For Asian Growth

Besides the AIA sale, AIG was also forced to sell Japan-based life insurance subsidiaries, AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company to Prudential Financial (NYSE:PRU) and American Life Insurance Company (ALICO) to MetLife (NYSE:MET) for approximately $16.2 billion. These affected AIG’s in expanding its presence in Asian markets but helped pay off the debt the company owed to the American taxpayers. The U.S. Treasury sold the last of its stake in the company last week, generating $23 billion in profit on its total commitment to the bailout. Having come good on its promise to rebuild and  shed off the government ownership, AIG’s brand image has also improved in the eyes of the public. The management has rebranded the Chartis division, which accounts for almost 60% of the company’s revenues and EBITDA, to AIG Property and Casualty, linking it directly to the parent company.

AIG is now looking to expand its Asian operations and recently invested $500 million in People’s Insurance Company (Group) of China (PICC). [2] The company is planning to launch a joint venture with PICC in China to enter one of the biggest markets in the world. China has a population of over 1 billion and GDP annual growth rate around 8%. [3]

Life insurance premiums in the country grew almost 30% between 2001 and 2010, the highest growth in the world, but insurance penetration, measured in terms of premium income as a share of GDP, is still quite low at below 4%. [4] Compare this to a mature market like the U.K. which has a penetration of around 14% and you can see the potential that the country holds even in a market dominated by domestic players. [5]

AIG will also look to capitalize on the Indian government’s decision to increase foreign direct investment in insurance from 26% to 49%. The Union Cabinet recently approved the proposal and the bill will shortly be taken up by the country’s parliament. [6] Like China, India has a population of over a billion, a high GDP growth rate and a low insurance penetration of 4.4%. [7] AIG entered the country in 2001 with a joint venture with Tata Group, Tata AIG General Insurance Company Limited (Tata AIG General).

We believe that AIG is on the right course for international expansion. You can modify the interactive chart below to gauge the effect a change in AIG’s share in the property & casualty insurance market will have on our price estimate.

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Notes:
  1. AIG To Sell Stake In AIA, Wall Street Journal, 17th December, 2012 [↩]
  2. AIG takes Another Jump Into Asia, Wall Street Journal, 22nd November, 2012 [↩]
  3. China GDP Annual Growth Rate, Trading Economics [↩]
  4. Foreign insurance companies in China, PWC [↩]
  5. Presentation To The American Council Of Life Insurers, Goldman Sachs Investment Banking Division, 28th March, 2012 [↩]
  6. Big bang reforms: Cabinet approves 49% FDI in insurance, 26% in pension, Times of India, 4th October, 2012 [↩]
  7. Life insurance penetration dropped in 2010-11, Indian Express, 15th May, 2012 [↩]